Question

Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$275,000
Year 2	$500,000
Year 3	$450,000
Year 4	$475,000

Cold Goose Metal Works Inc.’s weighted average cost of capital is 10%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)?

$325,746

$1,325,746

$825,746

$990,895

Answer 1

As new project has same risk hence:

R = Interest rate = Discounting rate = Weighted average cost of the capital

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Equation / Formula for calculating NPV:

Net present value = - Initial investment + Cash flow at year1 / (1+R)^1 + Cash flow at year2 / (1+R)^2 + Cash flow at year3 / (1+R)^3 + Cash flow at year4 / (1+R)^4

Net present value = - 500000 + 275000 / (1+10%)^1 + 500000 / (1+10%)^2 + 450000 / (1+10%)^3 + 475000 / (1+10%)^4

NPV = Net present value = -500000 + 250,000.00 + 413,223.14 + 338,091.66 + 324,431.39

NPV = $825,746.19

Hence,

Correct option is > $825,746